Higher Import Duty to Increase Gold Smuggling in India

,RAPAPORT... The increased gold import duty imposed by India's government may lead to more smuggling activity, but the tax is unlikely to have much of an impact on consumer demand in the world's largest gold market, industry observers said. The government on Monday increased the import duty on gold and platinum to 6 percent from 4 percent effective immediately in an effort to discourage demand, which has contributed to the country's large current account deficit.

“The duty hike sums up to around INR 60,000 per kilogram of gold. To be clear, with this duty hike a difference of 7 percent between the international and domestic price of the yellow metal is evident,” said Prithviraj Kothari, the managing director of RiddiSiddhi Bullions Ltd. “This may lead to rise in illegal channels and malicious activity with respect to importing gold and related products like jewelry in the country.”

Before this latest increase, the All India Gems and Jewelry Trade Federation (GJF) stated that gold smuggling increased after the government doubled the import tax on the yellow metal to 4 percent almost one year ago. GJF requested the government reduce that earlier tax by 2 percent in its federal budget for fiscal year 2014, due to be announced on February 28.

“Gold worth INR 9.42 billion was seized during a brief period of three months. Further increase in the import duty will encourage smuggling and the income generated from these activities might be used in various illegal activities,” GJF’s chairman Bachhraj Bamalwa had said. The latest data on gold smuggling was not immediately available.

The brokerage firm Nomura said that gold demand has risen as a hedge against inflation. “Therefore, we think imposing import duty will likely only shift gold imports from official to unofficial channels as it tackles the symptom, not the cause,” it noted.

Kothari said that the higher import duty, however, would not curtail demand as the precious metal has always been regarded as one of the best investment options for financial security. Industry officials are concerned that the duty will lead to an increase in unemployment among the country's skilled artisans.

Nalini Rao, a senior research analyst covering the bullion sector at Angel Commodities, said that there might be some impact on the demand in the short term but that jewelry demand is expected to be firm in the longer period due to wedding and festival seasons. She added that the duty would help narrow the country's current account deficit as gold is the second largest import item after crude oil.

India’s current account deficit for the first fiscal half, which ended on September 30, 2012, stood at $38.7 billion, or 4.6 percent of its gross domestic product (GDP), much above sustainable levels of 2.5 percent of GDP.

Divyesh Shah, the group head of retail business at Tribhovandas Bhimji Zaveri (TBZ), stated that consumers have adjusted to high prices for gold and the increase in import tax was unlikely to have any larger impact on the demand.

Gold prices in the local market have increased slightly after yesterday’s duty hike and currently prices are around INR 30,750 per 10 grams. IN 2012, prices rose to an all-time high in local currency to over INR 32,500 per 10 grams.

After raising the duty this past year, the government achieved some success in curtailing imports as the country’s gold and silver imports declined about 33 percent ‎year on year to $21.3 billion during the April to September 2012 period. Gold imports in fiscal 2012 amounted to $56.5 billion and in the current fiscal year up to December 2012, gold imports were estimated at $38 billion.

While gold imports have fallen, the higher oil prices, weak exports, flagging invisibles balance and inelastic demand for imports of coal, fertilizer and other commodities have led to a sharp rise in India’s current-account deficit, Nomura stated.

“With exports likely to recover in 2013, we expect India’s current account deficit is expected to improve but will remain around 4.3 percent of GDP in fiscal year 2014, due to high oil prices and continued domestic supply-side constraints boosting import demand,” the brokerage firm added.

Nomura said that given the country’s penchant for gold at weddings and other religious ceremonies, a sharp fall in volume was unlikely. It expects India's gold imports to ease to $44 billion in fiscal 2014 from an estimated $48.3 billion in fiscal year 2013.